" . . . a resilient group in excellent shape . . . "

Kevin Thompson, Finance Director

I am pleased to report that turnover for the year was 9% higher than last year at £293 million (2002/03: £267 million). Turnover on continuing operations was increased by 10%. Profit before tax* set a new record at £50.3 million (2002/03: £46.5 million). Return on sales* exceeded 17%, as it has now done every year for more than a decade.

Currency translation, with about one-third of our profits linked to the currently weak US Dollar, offset slightly by profits earned in stronger Euros, reduced 2003/04 reported sales and profits by around 2%. Looking ahead, if the US Dollar and Euro were to stay at their level so far in this new financial year and with the current mix of results we might expect a further 3% adverse translation impact on our 2004/05 profits.

The extra £1.7 million of UK National Insurance, pension and general insurance costs which I anticipated in my review last year have arisen and have been funded within this year's profits. These extra costs are ongoing. However, their effects are mitigated by our success in producing consistently high net and gross margins through continuous improvements in procurement and processes.

T6% of the turnover increase over last year came from acquisitions. Stripping out the currency effect and the incremental impact of acquisitions and disposals, I am very pleased to report that these figures show 6% organic growth in turnover, and profits show the same trend.

Each year I comment on our key metric, return on capital employed (profit before tax* expressed as a percentage of net tangible assets). This key indicator guides our operations, combining both return on sales and asset turns. We have generated £22 million of cash in the year and despite its inclusion in the Group's return on capital employed calculation we still produced a figure of 52% - remarkable by any measure.

On my regular visits to our businesses I see the benefits we obtain from a deep understanding of the importance of producing high returns from the minimum possible level of assets. This efficient use of assets benefits our customers and shows through in our return on capital* which has exceeded 40% for well over 20 years. We grew this year and used less operating assets to do it. The result of these outstanding returns is a strong flow of cash available to us for further investment in our businesses, to pay dividends and to make acquisitions.

New products and innovation in our processes underpin our future growth. This year we invested a record amount of £11.2 million, about 4% of turnover, in research and development. We have maintained the investment in the capital assets used across our businesses with capital expenditure once again at a typical level of around 125% of depreciation. We have used the tougher market conditions which we have experienced in the recent years to strengthen our businesses with this type of investment, to gain market share and put ourselves in the best shape for the future.

The Board recommends a final dividend of 3.75p per share, giving a full year dividend of 6.19p per share, 7% up on last year's record level. This dividend represents a continuation of Halma's progressive dividend policy and also makes a small contribution toward increasing the dividend cover which is our intention over the medium term.

If approved, this final dividend will be paid on 23 August 2004 to shareholders on the register at the close of business on 23 July 2004. Together with the interim dividend this will give a total of £23 million paid to shareholders in relation to the 2003/04 year financed by our strong cash flow, with a total of £88 million distributed as dividends in the past five years.

With three-quarters of the Group's sales made overseas and half the profits made by companies based outside the UK, the Group's results are sensitive to movements in exchange rates, particularly the US Dollar and Euro. Currency movements in the year affect our results through the translation into Sterling of profits earned in local currencies as well as affecting the underlying transactions. We have an element of natural hedging, in particular through the purchase of components in US Dollars. Our operating companies hedge their trading transactions back into their local reporting currency. We do hedge the majority of our US Dollar and Euro net assets using currency loans. The objective of our treasury activities is risk management and control, no speculative transactions are undertaken.

The effective tax rate on profits* was 31.3% compared with 32.9% in 2002/03. We benefited from higher profits earned in lower tax jurisdictions, including China.

We have continued to adopt the transitional provisions of FRS 17 (Retirement Benefits) pending the introduction of International Accounting Standards. The value of the pension plans' assets have increased since the last balance sheet date as can be seen from the FRS 17 disclosures, however revised inflation assumptions have increased the calculated liabilities. The net deficit on an FRS 17 basis has reduced by 7% to £29 million after the related deferred tax.

*see Financial Highlights

As noted last year, we have closed our defined benefit schemes to new members and established a defined contribution scheme. Contributions into the defined benefit schemes are in line with the actuaries' recommendations, following the triennial actuarial valuations last year and are fully reflected in the Consolidated Profit and Loss Account, with no further increases necessary at this time.

I note that the funding of pension obligations is a long-term issue, even though scheme assets are subject to short-term fluctuations. Our long-term funding basis is solid and the currently reported deficit, by any set of rules, is small relative to the Group's market capitalisation.

I remain committed to maintaining strong internal control across the Group. For many years we have successfully used our senior finance staff to carry out reviews of our operating companies at half year and year end, making rotational visits at other times to assess internal controls. During the year we have enhanced these procedures and in particular those relating to internal control visits by the introduction of independent reporting lines. In 2004/05 we intend to confirm that our procedures amount to a formal internal audit function.

Through close monitoring of our businesses, the use of simple relevant systems and involvement of high quality finance executives based at each operating company, we continue to have a strong control environment whilst providing value to our entrepreneurial operations.

We have taken a number of actions to improve our businesses and make good use of our cash. Shortly before the end of the year we sold three non-core businesses for £5 million. They accounted for turnover of £13 million and in aggregate were operating around breakeven. If these discontinued operations are excluded the Group's return on sales is 18%. After deducting the costs of sale and pension and property obligations retained within the Group, the net result was an exceptional charge of £9.1 million including goodwill of £5.8 million. The goodwill adjustment is a non-cash item and includes £5.6 million previously written off to reserves and now recycled. The net effect of the disposals will be a net cash inflow to the Group having met all necessary costs.

Combining the proceeds from the above transactions with our existing self-generated cash, we spent £22 million just after the year end on two high-quality acquisitions, Diba Industries, Inc., and Ocean Optics, Inc. This active management produces an even stronger base for future growth.

International Accounting Standards will be in full effect for the first time in our 2005/ 06 accounts, although preparations are in progress now to collect data for use in the comparative figures. Other than the additional disclosures which will be required, we anticipate that these new Standards will have most impact in the following areas: accounting for share options, pensions and accounting for research and development.

Our returns and cash flow performance this year have been up to the high standards we have established over many years. The business has been strengthened by investment in new product innovation, prudent acquisitions, the disposal of non-core assets and by further process improvement. The objective remains unchanged, to maintain a resilient group in excellent shape to create even more value for our shareholders.